question for the business savvy traders

M

maler

Suppose two partners form an investment advisor.
One brings capital from personal high net worth connections.
The other programs a systematic investment strategy.
The partner bringing the capital is majority owner and has control.
After several years, the partner with connections learns the
strategy and can run it on his own.
He decides to disolve the parnership and run the strategy
(perhaps inconsequentially modified) on his own for the
same investors, inside a newly formed advisor.
Does the minority partner left out have any recourse to this?
A very good (i.e. expensive) lawyer could come up
with some precedents and figure this out,
but I am curious to see what traders think about it.
 
I don't see that the junior partner has any recourse. The scenario could just as well play out in reverse: The junior partner meets the deep-pocket investors and strikes a private deal with them.

The mistake was forming a partnership in the first place. The junior partner should form his own company and manage an allocation supplied by the major partner. That way they can separate anytime and for any reason and remain "friends".

I have a similar situation. I'm a computer nerd with no interpersonal (i.e. sales) skills whatsoever. My friend is a super salesman with deep-pocket investors, who barely knows how to turn a computer on and off. He keeps talking about hiring me to build a system to manage money. Even though we trust each other, I'm not interested in a partnership or employment. I might consider a deal between entirely separate businesses at some point.
 
You could always look into some kind of non-compete. The corporate entity hires both of you; as condition of employment, you must agree not to use what you learned, or contact employees/investors at the current firm, for 36 months after end of employment.
 
Quote from heech:

You could always look into some kind of non-compete. The corporate entity hires both of you; as condition of employment, you must agree not to use what you learned, or contact employees/investors at the current firm, for 36 months after end of employment.
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"Not use what you learned"? I would like to see how that is policed. I dont know how you would enforce that.
 
I think this is a touchy area with no real answer as it will depend on the details of the particular situation.

Lot's of firms sue each other over "stolen code" or client rolodexes that an ex-employee brings over. Sometimes the litigating firm wins, sometimes they lose.
 
Quote from rtiger29:

"Not use what you learned"? I would like to see how that is policed. I dont know how you would enforce that.
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Standard in any NDA, and many employment contracts. You have to be relatively specific about the information you're protecting, but it's certainly viable.

There's rarely an iron-clad contract, in any aspect of business. You're just trying to raise the bar. If your partner abandons you, and *if* he succeeds in his new business... then he has to look over his shoulder at a possible lawsuit. A lawsuit, by the way, in which he'll have to provide *your* attorneys + the court system all kind of details about exactly how he's operating his current business + developed trading strategy. He'll have to weigh whether that makes sense.

That said, as someone who's been in any number of businesses + startups over the years:

- yes, make sure you have a lot of equity in the current deal, and (if an actual corporation) its structured such that your business can not be sold out from under you,

- no, don't worry so much about "fairness" beyond that. Your partner might make more money than you, might have more choices than you down the road... but at the end of the day, it's all about growing the size of the pie, not fighting for a larger slice of a tiny, insignificant pie.
 
Quote from rtiger29:
"Not use what you learned"? I would like to see how that is policed. I don't know how you would enforce that.
More...
No court will enforce such a provision. People have a right to practice their trade or profession.

In a more general sense, written agreements are a good idea. However, they should be relied on only as a last line of defense because of the cost of litigation. The purpose of agreements should be to avoid conflicts.
 
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